A fantastic quote from mahalanobis:
There are a lot of talking heads saying that what is going on is a sane ‘repricing of risk’. It’s a cliche right now. But I don’t think investors are not so much re-evaluating the volatility or covariance of these assets, but rather re-evaluating the expected return. They are downwardly adjusting the expected forward payments independent of the discounting function, as the probability of default for sub-prime mortgages, or LBO’s, is being adjusted to more reasonable levels. Increasing the probability of default is not increasing risk so much as decreasing the expected return. They go together, of course, because higher default probability bonds have higher volatility too, but the expected return is the dog and the volatility of that return is the tail.
Behavioural road-map score: 5 out of 10.
Bad times indeed. I challenged fate and I came up short.
Despite the apparantly random nature of markets, in this great game it appears significantly easier to lose money than it is to make money, commissions aside.
I plod on, enjoying the pleasant weather, the occassional round of golf, the odd holiday and the nice meal, and all the while, in the back of my mind, I wonder what I am really doing with my life, questioning what is worthy and what is futile.
Behavioural road-map score: 7 out of 10.
A gain of 3.0% brings my equity line back to the old highs (around £12,550) during the life of this blog. Also, I’ve paid for my holiday and set aside a few hundred pounds for my car insurance, so I shouldn’t be hit by any more big expenses in the coming months other than the regular running costs. My equity ‘leakage’ had recently been very high, running at close to 50%, so I hope the future months are more generous to my results.
The roadmap score is a little lower than in recent weeks because I found myself pushing too hard at one point in the week, although I managed to extricate myself from this situation quite well, calling on my extensive bank of tortuous memories. It’s worth noting that in this instance, the net result of pushing too hard was close to neutral – indeed, I would pay money not to receive positive feedback from badly motivated trades, as it isn’t conducive to sustaining the long game.
From the July 7th 2007 edition:
Appealing to my contrarian nature, this picture perfectly captures the risk of blindly following what has worked in the past simply because of the very fact that it has worked. It would make a great poster for risk-managers.
Thanks to IPDaily for relating the short story of ‘The Station‘ by Robert Hastings. Life is indeed a journey and not a destination.
Behavioural road-map score: no score.
I’ve been on holiday over the past week, so no trading. It’s nice to come back to my desk with a refreshed mind.
Behavioural road-map score: 9.5 out of 10.
I am playing the game with a firm hand. It is a game of small proportions, with returns covering my expenses and adding only a residual amount to my total equity. Nevertheless, I am content with the state of play. The longer I spend around these levels, the more my capital changes from ‘speculative gains’ to ‘account equity’, with my mindset mutating alongside toward the ‘capital protection’ stance (vs the high stakes speculator). It is purely psychological, since £1 is £1, regardless of how it has been acquired, but the effect is very much real.